Strong fundamentals could lift financial funds: as long as a strong economy persists, wealth management stocks won't run out of steam

Money Digest, June, 1998 by Levi Folk, Richard Webb

After the astonishing rise of wealth management funds such as AIC Advantage over the last few years, it may seem a little late to look at products which concentrate on financial stocks. But there may still be some steam left in this powerhouse sector.

Reasons abound for the rise in financial stocks during the late 1990s. Demographic factors have created a market of boomers that is hungry for wealth management services. This long-term trend has certainly not run its course; there are 73 wealth management firms involved in the mutual fund industry -- and no doubt there will be much merger activity in this sector as competition grows.

As long as a strong economy persists, banks and insurance companies can use leveraged balance sheets to generate stronger earnings streams than many other industry groups. This furthers the case for some financial exposure in any fund portfolio. The bank mergers planned in both the United States and Canada are unlikely to be the last, and will help stock prices move higher. Furthermore, financial stocks are not excessively overvalued relative to the overall market.

Investors can either get financial exposure from a dividend fund (highest in financials are the Altamira, Royal and Green Line dividend funds), a diversified fund such as Infinity Canadian or AIC Diversified Canada fund (which have roughly 35% exposure to the sector) or one of the financial funds listed in the table above. AIC, of course, has the best track record. Its new American Advantage fund buys mainly financial firms in the United States. The other funds are very new, but CIBC's fund is noload and has the lowest management expense ratio.

The above article was condensed from The Fund Counsel ($140/year), 76 Mitchell Ave., Toronto, ON M6J 1B9. Phone (416) 504-7217.

                              Financial funds

                                               3 mth.   1 yr.   3 yr.
Fund name                          Commission  return  return  return   MER


AIC American Advantage Fund               F/B     8.5       -       -  2.72
AIC Advantage II Fund                     F/B    14.7     1.4          2.63
AIC Advantage Fund                        F/B    14.9    52.9    53.7  2.31
CI Global Financial Serv. Sector          F/B    10.8    50.0          2.42
CIBC Financial Companies Fund              NL    14.5       -       -  2.25
Fidelity Focus Financial Services         F/B    12.9       -       -  2.50
First Tr N Amer. Financial Inst.            F    11.6       -       -     -
Infinity Wealth Management Fund           F/B     8.3    44.3       -  2.95

Source: BellCharts (data as at Mar. 31/98)